Gauging ARV And Comps The Right Way –...

help Hi Moguls, this is Lex Levinrad with another helpful real estate investing lesson for you.

In my last 2 lessons, we discussed marketing to homeowners in foreclosure or pre-foreclosure. We learned why it’s so important to market to these foreclosure and pre-foreclosure leads and we also discussed different methods of marketing to them. Check out those awesome lessons, here and here.

In today’s lesson, we are going to focus on learning how to calculate how much to offer a seller when making an offer on a property. If you market to desperate sellers who are in foreclosure or pre-foreclosure, then you are going to get leads. Regardless of the method that you utilize to market to sellers, you will still get sellers calling you.

And when you do….

You are going to need to know what to say!

The Not So Scary Calculations

So, the first thing that you’re going to need to know and understand is what the house is worth. And the first thing you will have to learn is the ARV Formula. ARV stands for “After Repair Value” which is what the house would be worth once it was fixed up. If the house needs no repairs and is in move-in condition or the house needs a major rehab, the ARV Formula will tell you how much to offer.

Here is my formula:

After Repair Value (ARV) x 65% - Repair Estimate (RE) = Maximum Offer Price (MOP)

Broken down, this formula states that you should first figure out what the house would be worth on the resale market after it has been fixed up and ready to list on the MLS. This is called the ARV or After Repair Value, which is what you anticipate the house would sell for if it was listed on the market.

math So, once you have figured out the ARV, take 65% of that ARV and calculate what that amount is. Then when you have that amount, deduct how much it would cost to repair the property. This is the Repair Estimate (RE). The number you are left with is the Maximum Offer Price. The MOP is the most you should be prepared to pay if you were purchasing this property as a cash buyer in order to fix it and flip it for a profit.

See, not so scary, right?!

Show Me More

Who doesn’t love an example calculation, right?

So, let’s do just that using some round and easy numbers. Let’s say a seller contacts you and they want to sell their house. Prior to visiting their property, you’ve researched that houses of similar size in that neighborhood sell for around $100,000.

When you visit the homeowner and walk through the property, you note that the house needs about $10,000 in repairs in order to be ready for resale.

So, based on those numbers, you have an After Repair Value (ARV) of $100,000, and you have a Repair Estimate (RE) of $10,000.

So far so, good…

Now, using my ARV Formula, you calculate that 65% of $100,000 = $65,000. Then you deduct the Repair Estimate (RE) of $10,000 from $65,000, which is $55,000. That $55,000 is your Maximum Offer Price (MOP).

For all you visual learners, out there, check it out this way:

After Repair Value ($100,000) x 65% = $65,000

Less the Repair Estimate – $10,000

Maximum Offer Price = $55,000

-real-lie It’s crucial that you understand this formula as a wholesale investor. If you were applying to borrow money from me for a hard money loan, I would base my loan amount on the above formula.

This formula is very stringent. And it is not that easy to find many deals that meet this formula. But know and understand this…

If you can buy a property at the Maximum Offer Price, then it is a slam dunk. It’s a deal you need to move on – like, now. It’s a deal that will make you a lot of money. If you are rehabbing properties, then this formula will keep you out of trouble.

If you wait patiently, and only purchase a property that meets this stringent formula, then you will have yourself a property that will be a winner and make you a good profit.

Well, friends, I’m gonna wrap up here. I don’t want your brain to explode with all this math talk! Stay tuned, though, because in my next lesson, we’ll talk about questions to ask the seller, comps, and the difference between cash sales and retail sales. See ya then!